Turkish equity markets, which have been among the world’s top performers over the last year, hit some major turbulence on Tuesday as revelations of arrests over a recent coup plot and ongoing trouble in neighbor and longtime rival Greece spooked investors. The news sent the iShares MSCI Turkey ETF (NYSEARCA:TUR) plunging more than 5% on the day.
According to various sources, including the BBC and the Canadian Press, prosecutors interrogated 51 Turkish Military commanders on Tuesday about alleged plans to destabilize the country by blowing up mosques and provoking Greece into shooting down a Turkish plane over the Aegean Sea in order to trigger a coup and topple the government.
This event brought up memories of the forced resignation of the Turkish Prime Minister in 1997, the fourth overthrow or forced resignation since 1960, and left investors to wonder how far the emerging market has really progressed and whether EU membership is attainable at any point in the near future.
Furthermore, economic trouble in nearby Greece has begun to act as a major drag on the Turkish economy. With widespread discontent in Greece, which is often considered a jumping off point for Turkish immigrants looking for better opportunities in Europe, more Turkish workers will likely be forced to stay home, further increasing the possibility of social unrest and a rising unemployment rate. Should Greece get kicked out of the euro-zone, it would leave Bulgaria as the only direct link between Turkey and the EU, effectively isolating the country from direct routes to euro currency countries.
Meanwhile, a Greek bailout or continued trouble in the euro is unlikely to be good news for Turkey either; three of its top five export destinations are euro zone nations. This could have a negative impact if the euro falls further against the Turkish New Lira and Turkish exports become more expensive. Relations between the historical rivals could be strained even further if Greece drags down Turkey along with it.
TUR is up more than 140% over the past year, but it has slumped since the start of 2010, posting a loss of about 6%. Any loss of confidence in the Istanbul market would be especially devastating for the Turkey ETF since nearly half of the fund is in the financial services industry, which is generally sensitive to drops in confidence.
Disclosure: No positions at time of writing